Abstract

Aspects concerning the risk of a project are often not included in projecting the value or benefit expected of an environmental project. Three measures, involving the variance around the expected value, the volatility, and the cumulative probability of making a profit, are shown to be the correct way to characterize the risk. This procedure allows one to distinguish between projects that have the same expected value and that would otherwise be considered equal in worth. In addition, the acquisition (at some cost) of both further data and further studies in attempts to better resolve the project are shown to depend on two factors: first, whether the information is to be acquired in order to produce desired changes in the success and failure chances of the project (which such newly acquired data may not end up doing); and second, even if the data do as required, one cannot use the difference between expected values of the project in the absence and presence of the new data to provide an estimate of value-added to the project assessment. Such a determination can arise only when measures of risk and uncertainty are used in addition to expected value because expected value, on its own, does not contain the risk information required. Numerical examples are presented to illustrate these points.

Ian Lerche is Professor of Geology at the University of South Carolina. His current major research interests are in the fields of basin analysis, salt, economic risk, and environmental problems. He has published several hundred papers, more than dozen books. He is the recipient of numerous awards and honors, including the Levorsen Award of the AAPG. Currently, he sits on several editorial boards and is also technical editor of Energy Exploration & Exploitation.